SFTBY - SoftBank To Acquire AI Company Berkshire Grey: A Small Under-The-Radar Deal With Potentially High Returns

2023-04-14 08:26:38 ET

Summary

• SoftBank is acquiring AI company Berkshire Grey.
• The deal is expected to close in Q3 2023, subject to regulatory and stockholder approval.
• SoftBank has been a shareholder in Berkshire Grey since 2019 and is an experienced serial acquirer.
• If the deal breaks, there is a significant downside, but the likelihood of that happening is small due to SoftBank's knowledge of the target and Masayoshi Son's bullish outlook on AI.
• The low risk of a deal break and the potential for a quick close make it an attractive investment opportunity with an annualized return of up to 20%.

SoftBank ( SFTBY ), the Japanese investment giant, is buying Berkshire Grey ( BGRY ), a busted IPO focused on AI-enabled robotic technology solutions for eCommerce companies. SoftBank has been a shareholder in Berkshire Grey since 2019. SoftBank is led by Masayoshi Son, a Japanese entrepreneur, and investor, who is not afraid to throw money at early-stage or unproven technology. This often doesn't work out, but he has a number of big wins too, that include Alibaba ( BABA ), Yahoo, and Uber ( UBER ).

The deal is expected to close in the third quarter of 2023. It requires regulatory approvals and stockholder approval. I don't expect problems on either front. AI is definitely in the bullseye of regulators. However, Berkshire Grey is a tiny $334 market cap company. SoftBank is a Japanese acquirer and a well-known hands-off investment entity. There shouldn't be any fears about technology leaving the country. Meanwhile, the transaction allows a U.S. AI company to continue pursuing innovation (perhaps even in an accelerated fashion as part of the SoftBank conglomerate).

The percentage return from 1.37 to 1.4 is approximately 2.19%. That's not a lot, but $300 million dollar deals tend to close in short order. They don't require a year or longer like the big league deals; Microsoft ( MSFT )/Activision ( ATVI ) deal e.a. An added reason I believe the deal could close quickly is that SoftBank is a very experienced acquirer. It is buying companies all the time, and a tiny deal like this is no problem for the company to handle. Meanwhile, its deal teams aren't exactly overwhelmed with work, so they should have more than enough time to be on the ball here.

There is no doubt the acquirer can close as it has $43 billion+ in cash and appears to be selling down most of its Alibaba stake. It is also in the process of listing U.K. chip designer Arm in the U.S. which is likely going to be a big story.

If the deal breaks, there's likely at least a 50% downside. There is a relatively large break fee, but I don't think it will be much consolation under these circumstances. I think the odds that the deal breaks are extremely small given that SoftBank has a fearless reputation, not exactly a reputation for extensive due diligence, the deal is less than a rounding error to them, and it has been an investor here since 2019. Not to mention, Masayoshi is a huge bull on AI. The headline above the most recent message from the Chairman/CEO is all about AI. Son doesn't even seem to be concerned about returns. He differentiated SoftBank as a capital provider instead of an investor:

SBG is especially keen to focus on AI, which is the most advanced component of the Information Revolution. We are proud to say that SBG is likely the largest provider of capital to entrepreneurs in the field of AI. AI is redefining every industry, including autonomous driving, healthcare, finance, education, and retail. Just as human power was replaced by machines in the Industrial Revolution, I suspect machines will be replaced by AI in the Information Revolution.

The most important goal for investors is to make money, but for capital providers, it is to create the future. The Rothschilds, as a capital provider, laid the foundation for our lives in the Industrial Revolution, and the future (from then) up to the present. Likewise, SBG, as a capital provider for the Information Revolution, has made it our mission to help shape the future. This is what being a capital provider for the Information Revolution means.

SoftBank knows what it's buying. The only drawback of this deal is the small absolute return, and the fact (at least my broker) requires a lot of margins to support a position. This is another one of these small, under-the-radar deals that could close sooner than the market expects. If it closes in 1.5 months from now, the annualized return would be close to 20%. If it closes 2 months from now, the annualized return would be around 15% still. If it closes in 3 months, the annualized return would be around 9%. The latter isn't fantastic but given the relatively low risk of a deal break, it would still be a reasonable outcome.

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